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A front-page article in the People’s Daily in May sent shockwaves through the Chinese bureaucracy. It quoted an unidentified “authoritative figure” warning readers of the ruling Communist party’s flagship newspaper about the country’s dangerous addiction to debt.

After a tumultuous start to the year, which began with a stock market and currency crisis, the government had needed strong first-quarter growth to restore confidence in its ability to manage the world’s second-largest economy. So there was relief when it was announced, on April 15, that the economy had grown 6.7 per cent in that period. The feeling soon evaporated, however, over concerns that the growth had been “bought” at the expense of financial discipline. In January alone, banks had issued Rmb2.54tn ($380bn) in new loans, expanding China’s property bubble and giving rise to a new one on its commodity exchanges.

According to party and government insiders, the article — a blunt warning that things had to change — was written by one of President Xi Jinping’s key economic advisers, Liu He, who runs a Communist party “leading group” on financial and economic affairs. Such groups have existed for decades but since Mr Xi took office in March 2013 they have achieved a new prominence as he employs them to drive home his status as the country’s most powerful leader since Deng Xiaoping.

The front-page story was interpreted by party officials as a shot across the bow of the government’s top body, the State Council, traditionally responsible for the day-to-day management of the economy, and headed by Premier Li Keqiang. That the criticism can be traced back to a group headed by Mr Xi and one of his key advisers hints at their frustration with the State Council’s handling of the economy.

“The leading group was annoyed by the first-quarter growth statistics because it felt that using the property sector and government-directed leverage to boost growth was irresponsible,” says one person familiar with the group’s deliberations. “Its argument was that Xi was going to have to get more involved [in economic policy]. Li hadn’t used the space effectively.”

The State Council information office says suggestions of discord between Mr Xi and Mr Li are “without foundation”. According to Li’s defenders, such debates are not suggestive of a broader factional rift between the president and premier. There is, however, increasing disagreement over how fast and effectively agreed polices are being implemented.

Presidential consolidation

China’s party-state has always been just that — a party-led entity. Mr Xi’s real power flows from his positions as party general secretary and head of its military commission, which controls the People’s Liberation Army. He assumed both posts in November 2012, four months before becoming president.

How has Xi Jinping, China’s leader since 2012, grown to have such power in such a short time and what does he want to do with it? James Kynge, the FT’s Emerging Markets Editor, talks to Kerry Brown, professor of Chinese politics at King’s College, and Tom Mitchell, FT Beijing Bureau Chief

Tuesday, 26 September, 2017

The party’s primacy, however, has never been more blatant than it is today. In less than four years Mr Xi, the son of one of China’s founding revolutionary heroes, has placed it front-and-centre in spheres, such as economic policy, that were previously delegated to the State Council and its ministries. In doing so, he has transformed the nature of power in China and changed the way foreign governments, multinational corporations and international financial investors interact with the world’s most populous country.

“It [the article] was as if the chairman of a large state-owned enterprise had sent a critical email to the chief executive, cc’d to everyone in the company,” says one Asian diplomat. “After that, nobody was sure what to do.”

By telegraphing his intentions so explicitly on the front page of the party’s flagship newspaper, the president was further raising the stakes in what is already a bold gamble. Mr Xi had already shocked the establishment by unleashing the party’s anti-corruption watchdog to target not just the senior echelons of the party and government, but also the military. Now he is using another party entity to deliver a similar jolt to those running the economy.

His boldness appears motivated by two convictions: that China’s economy is poised at a “make-or-break” moment, and that only a reformed party can steer the country through the treacherous rapids ahead.

Mr Xi has built his formidable reputation on the strength of his domestic anti-graft drive and a willingness to project power abroad, as Beijing asserts its territorial claims in the South and East China seas. But he will have to tackle deep-rooted economic problems in order to be recognised by history as a “transformative” leader in the mould of Deng, the architect of the country’s economic reforms, and its revolutionary founder, Mao Zedong. This partly explains the urgent tone of the People’s Daily broadside in May, especially as growth is slowing to rates not seen in a quarter of a century.

He has a commanding presence and rhetorical eloquence but also a ruthlessness that his two immediate predecessors, Hu Jintao and Jiang Zemin, lacked. “Xi’s rivals were shocked at how quickly he consolidated power,” says one senior Chinese government official.

By dint of his family’s revolutionary heritage and a career that has taken him through every level of government — from an impoverished village in the country’s north-west to head of one of its most economically advanced provinces — China’s president has demonstrated a fearsome understanding of the internal power dynamics of the Chinese Communist party.

Unlike his two predecessors, Mr Xi assumed control of the party military commission at the outset of his term and heads a streamlined Politburo Standing Committee, the party’s top decision-making body, which has been reduced in number from nine members to seven. Adding to the sense that China’s president had an ambitious blueprint, two of his erstwhile rivals — Bo Xilai and Zhou Yongkang — were jailed for life in 2013 and 2015 respectively for corruption.

“Jiang Zemin and Hu Jintao both began their terms in office with anti-corruption campaigns,” David Shambaugh, a Sinologist at George Washington University, said at a recent lecture in Beijing. “[The campaigns] both lasted about six months. They fizzled out and corruption continued to grow. This one has not fizzled out.”

Mr Xi’s anti-graft effort, which has felled more than 150 senior officials with vice-ministerial rank or higher plus thousands of other low-ranking figures, and the more muscular foreign policy are closely interlinked. One of the core aims of the crackdown has been to clear out the rot in the People’s Liberation Army, transforming it into a lean military capable of enforcing the country’s territorial claims.

Both initiatives are popular with the Chinese public. Ask any man or woman on the street what they think of their president, and the most common reply is that he is a strong leader who is fan fubai — “opposed to corruption”. His willingness to project power across the South and East China Seas also touches a chord with a populace steeped in nationalist propaganda — so much so that the party risks a political backlash if it is ever perceived to be weak in asserting territorial claims.

That popularity has in turn given Mr Xi the political capital he needs to tackle his third and arguably most difficult policy objective — the most ambitious set of economic reforms since those launched by Deng almost 40 years ago. These include some 340 policy initiatives, ranging from the relaxation of China’s “one-child policy” to land reform, unveiled at the third plenary of the 18th Communist party congress in 2013.

Many of Mr Xi’s core reforms are politically risky, especially a “supply side” restructuring of the economy away from investment and heavy industry to consumption and services. They entail plant closures and job losses and must be enforced by central government ministries and local officials who fear the instability they could create. So far, China’s president has little to show for his bold economic vision.

“Almost three years later we see minimal implementation,” said Mr Shambaugh. “The [reform] package was more of a blueprint than a road map . . . There was no sense of prioritisation or sequencing in it. They sort of threw it all out there and said here are 340 things you [party and government officials] have to do.”

Party control

In frustration, Mr Xi is using the party to assert authority in areas traditionally devolved to central or local governments. The change has been so dramatic, especially over the past year, that party and government officials talk about Mr Xi’s rapid consolidation of power in martial terms. “The south,” they say, “has taken over the north.” The reference is to the 1.2 sq km compound at the heart of the Chinese party state, Zhongnanhai, where government offices are situated near the north gate while party offices are clustered further to the south.

A central element of Mr Xi’s power grab has been his use of the party “leading groups” — whose existence was in some cases treated as a state secret for many years — to co-ordinate policymaking and implementation across government agencies.

The leading group for financial and economic affairs run by Mr Liu, the president’s adviser and author of the People’s Daily article, is the most prominent. It first began to garner attention in the wake of the State Council’s botched effort last summer to rescue China’s cratering stock markets. “[Its] influence really increased in July [2015] after the stock market crisis,” says one Asian investment strategist who now receives news alerts every time Mr Liu or any of his party colleagues are quoted in the Chinese media. “What the leading group says seems to have more influence. Its voice is clearly becoming louder.”

Under Mr Xi they are increasingly recognised as important power centres. The president is director of at least six of the leading groups, including newly created ones focused on cyber space, economic reform and national security.

Evan Medeiros, a former Asia adviser to President Barack Obama now with the Eurasia Group, the political risk consultancy, says the function of the leading groups is “similar but not identical to” the National Security Council or National Economic Council in the US. “They can call together most other organisations and try to drive everybody to answers on difficult policy questions,” he says.

Foreign governments, companies and investors have taken notice. US and EU negotiators, for example, have been surprised to see representatives of the party in attendance at bilateral trade negotiations, in addition to usual suspects such as officials from the National Development and Reform Commission and banking regulator. “We always knew the party kept a close eye on things,” says a European diplomat. “But it never had a seat at the table before.”

Similarly, when US and European business groups last year sought to express their concerns over draft regulations governing Chinese banks’ use of foreign IT equipment, they sent a letter to the newly created Party Leading Group for Cyberspace Affairs, bypassing the banking regulator.

“There was a lot of discussion about whether to send it to the banking regulator,” says one person involved in the lobbying effort. “But we were worried it would just get lost in the weeds [there]. In our analysis the cyber space leading group was the swing factor.” After an intense lobbying effort by western trade associations and government officials, including Mr Obama, implementation of the draft regulations was delayed.

‘Disrupting the pecking order’

Such incidents have not endeared the party leading groups to front-line ministries and regulators, especially those traditionally entrusted with responsibility for the economy and financial sector.

“The leading groups add another layer to the decision-making process, which the bureaucracy hates,” says a former Chinese government official who maintains close ties to his former colleagues. According to another person close to Chinese policymakers, the leading groups have coalesced into a kind of “kitchen cabinet around Xi Jinping that has disrupted the pecking order”.

“The leading groups have gained more authority under Xi at the expense of the State Council and the ministries,” agrees Timothy Heath, a China specialist at the Rand Corporation. “There is consensus in the [party] about the need to centralise power in this manner to ram through reforms.”

Whether Mr Xi succeeds in his ambitious project will have reverberations far beyond China and the Asia-Pacific region.

“Xi Jinping’s stable hold on power matters to us in ways that probably weren’t true even three or four years ago,” says Kerry Brown, a Chinese studies professor at King’s College London. “The EU is in disarray [and] America looks like it’s very unstable at the moment . . . [So] suddenly Xi becomes hugely geopolitically important in ways he probably didn’t want to be.

“We’re going to see pretty soon whether this man is for real. That means that he’s got to not just start talking about initiatives but really effectively implementing them.”

Additional reporting by Gabriel Wildau

Xi’s leading man: When Liu met Lew

The Communist party leading groups that President Xi Jinping has used to consolidate his power often receive little, if any, mention in Chinese state media.

A notable exception is the group responsible for financial and economic affairs, which is increasingly at the forefront of important policy debates. Headed by Mr Xi, it has some two dozenmembers including Liu He, a key presidential adviser who runs the group’s general office and oversees its operations on a daily basis.

Mr Liu’s clout is increasingly recognised abroad. When China’s equity and currency markets melted down in January, it was Mr Liu who spoke about the developments in a phone call with Jack Lew, US Treasury secretary.

While Mr Liu holds a government position — he is one of 10 vice-ministers at the National Development and Reform Commission — he derives his real power from his party leading group job. It was in the latter capacity that he spoke to Mr Lew.

The US Treasury secretary has also visited Mr Liu at his office in an unmarked compound within easy walking distance of Zhongnanhai — the compound at the heart of the Chinese party state. According to visitors, one of the rooms in Mr Liu’s compound is lined with pictures of him meeting foreign dignitaries including Susan Rice, US national security adviser, and Christine Lagarde, managing director of the International Monetary Fund.

One foreign government official who recently visited Mr Liu says the president’s adviser is worried about the Chinese economy’s prospects. “He told us not to believe the people who say it’s spring in China again. It’s still winter.

“Our meeting with him was in English without translation and he was surrounded by overseas-educated staffers,” the person adds. “It was like meeting with a group of Americans except they were all members of the Chinese Communist party.”

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